Learn to protect yourself while lending to friends or signing security

Fri, Mar 31, 2017, 12:30 PM

'Do not lend to friends or borrow from them,' is a saying that is well-versed among experienced people: If you lend money to a friend, you might have to lose him, they say. But there is another saying: A friend in need is a friend in deed. It means that one who helps when in need is a true friend. Let us learn to beware, when it comes to lending money to friends or close ones.

Money can make enemies out of friends. This is a very sensitive issue. If it is not dealt with carefully, the very relationship will be soured. With a little bit of care, you can easily be rid of problems. Normally, no legal transactions are made between friends in money matters. But there is a lot of exchange of money between them, based on trust. The only premise for trust is that a borrower will return the money on time. But a borrower might fail to pay back on time, especially when needed to. There might be many reasons like, financial constrains, not realising your needs, or sheer negligence, as in any case there is no legal binding. Some even assume that they need not repay. Therefore, you must try to protect yourself before you lend a helping hand.

Loan after loanIrrespective of the reasons, your friend might approach you again to borrow money, even before he returns the previous loan. This is the beginning of trouble. Lending the amount asked for, will lead you in to further traps. Even if you don't give, it is not easy. Because, whatever you have lent the first time, might never be returned. You cannot hurt him by asking him to return the first loan. If in case he returns the whole amount, there is no problem. But if he returns only part of the amount, the problem will persist.

Better not lendBeware of people who come to you to borrow money. Do not commit either way, without thinking. If you say no, you might have to lose your friendship. Find out if there is any other means through which your friend can get the money he wants. Personal loan, gold loan, loan on Fixed Deposits (FD) or borrowing from a private financier, can be suggested.

If willing to lend...?If you are ready to lend money to your friend, you must take some precautions. You must demand to know when exactly you can expect your money back. You must specify the date before which it has to be returned. Even if the amount cannot be returned as a whole, make sure that it is returned at least in monthly installments.

Agreement mustIt is not wise to lend blindly to a friend. It is always necessary to make agreements, especially in money matters. In case of lending and borrowing, signatures, on promissory notes, written white paper or stamp paper are a must. Everything must be mentioned, from the time limit, rules and percentage of interest if any. Witness and guarantor signatures should also be taken. When stamped by a Notary, it will assume the status of legal tender and the transaction will be more transparent. Also, payment made through account payee cheque will make it more clear. Cheque no. too should be mentioned in the agreement. There might be a need to give post-dated cheques.

Gurmeet Singh Kenath, partner of DH Law Associates, suggested that the borrower should be ready to pay back, when the promissory note is produced. The loan agreement should be made on the basis of a positive and constructive framework. Promissory note will suffice for record purpose. It is better to have the agreement on a Stamp Paper and get it attested by Notary. The terms of repayment, whether all at one time or on monthly basis, should be specified. The full names, based on Identity proofs should be written on promissory notes or stamp papers. It should also be made clear that the interests earned through repayments, are taxable.

When Disputes AriseThe written agreements come in handy when a dispute arises between friends. If the repayment is not made on time, then you can proceed legally.

Precautions to be taken

The monetary transactions between two friends should not be discussed or brought up in the presence of others. This leads to rifts. Also, it will send a wrong signal that someone is facing financial constrains.If you are unable to lend to a friend when he come to you for borrowing money, you should make this clear to him, without holding back.

Take a decision over lending or not, only after determining the cause behind your friend approaching you for a loan.

If you have already decided to lend and you know that even if you do not get the money back, you are not going to lose anything, you can lend without fear.

If a friend approaches you and you have money meant for urgent needs like for your house or children's education, do not lend that money.

Experts suggest that by keeping at least five per cent of liquid cash on hand from your savings, it is convenient to lend to your friends. Even if they fail to return the amount, you will not fall into trouble.

What happens after lending?For some, it is very easy to say no to a friend. But think before saying no, as you might lose a good friend in the process. If you think that your friend truly needs money, you will have the credit of strengthening your friendship by lending him money.

TBNG Capital Advisers Founder Tarun Birani says that he first determines what to give his relatives and friends. Some are frequently asking for monetary support. For such ones, it is better to say no after lending a couple of times, said MoneyManthra founder, Viral Bhat. Or you must make it clear to them that they have a chance of requesting cash from you only after returning the previous loan.

RupeeVij CAFO Swapna Tiwari says that when someone comes asking for money, first think since how long you know this person or how frequently you two meet and talk. This way, you will know if the person is a true friend or not.

It is important to know the repaying capacity of a borrower, before lending. If the person has no job or is under heavy debt, lending to such a person is like giving loan to a river, which will never return. Ask for time to lend, if necessary. Some, who cannot wait, will go to others for the loan. This way you can escape from the problem.

Standing guarantee?While some come to us for a loan, others approach us to stand security, for a loan that they are taking. Do not take this lightly. If you sign as guarantor for another, it is almost like you have taken the loan yourself. You will have the same responsibility as the debtor, if he fails to repay the amount. It is not just your signature that your are lending, but stating indirectly that if your friend does not pay, you will pay instead of him. That is why the bankers first call the debtor in case of default of monthly instalments. In case of continued defaulting, they call the guarantor. The report of signing security will be recorded by CIBIL. If you fail to keep your promise, your CIBIL score will fall.

Before giving securityStill if you want to sign security to someone you know, you must study the paper thoroughly. If you have doubts, you must ask a lawyer and clear them. If any clauses are not to your liking, or unclear, do not sign them. Do not give your passport photo copy to anyone, except to financial organisations. If you are a guarantor, ensure that the borrower is making regular payments. Otherwise, your credit score will come down.

Before signing security for anyone, ensure that he or she has the capacity to repay.Because if they default, the guarantor has to bear the burden of debt. If you are guarantor to someone, the bank will make you sign on judicial stamp papers. Your bank account number will be taken. If the borrower does not repay, the amount is debited from your bank account. The primary responsibility of clearing debts will be on the borrower. If he fails, the guarantor has to pay.